Something unusual happened last month: A good-size American insurer, Penn Treaty of Allentown, Pa., was ordered to liquidate and wind down its affairs. Its demise will orphan tens of thousands of policyholders — people who bought its long-term-care insurance to shield their families from crushing nursing home costs.
Big insurance companies rarely fail in the United States. Most of the time, an ailing insurer will quietly find a buyer, and vanish under its rescuer’s wing. Policyholders may not know what happened, or care, as long as their claims are paid.
The dearth of visible insurance failures makes it seem the industry’s squadrons of actuaries and regulators will always get things right, measuring complex risks accurately and charging premiums that will cover all future claims.
But the failure of Penn Treaty shows that was not really true. It’s quite possible for a regulated insurer to miscalculate its book of business, operate for years without correcting the mistake, and ultimately take policyholders into the very realm of loss and uncertainty that insurance is specifically designed to avoid.
Now, some fear Penn Treaty’s failure is a signal of more trouble to come in the long-term-care sector. (...)
Michelle Leonard, a Penn Treaty policyholder in Venus, Fla., said she was shocked to learn of the liquidation.
“It’s time for me to go to a facility to live out my days,” she said, explaining that she had already selected a group home, submitted an application and been accepted (but had not yet sold her house). “They may not take me now. I may not have enough assets to go in.”
Each state has a so-called guarantee fund to rescue policyholders in insurance failures. The funds pay people’s claims, up to a predetermined limit that varies by state. The limit is $300,000 in Florida.
“But how long does that take?” Ms. Leonard wondered. She said that she had not yet heard from the guarantee fund, but added that she had received mailings instructing her to keep on paying her monthly premium in full, even if it rises, or else her coverage would be canceled.
“Oh, hey! We’re going down the toilet but keep paying your premium,” she said, mocking the letters. “It’s very upsetting.”
Other Penn Treaty customers agreed. “That’s why we have C.P.A.s and actuaries and insurance professionals — to run the business properly,” said Charley Sproule, a policyholder in Harrisburg, Pa. “In my opinion, the actuaries and executives and the board should be held legally liable for this, but they won’t. They’ll get off scot-free.”
In Pennsylvania, the guarantee limit is also $300,000. Mr. Spoule said the cash value of his policy was close to double that — $573,000. So is the cash value of a separate policy held by his wife, Mary Lou.
Mr. Sproule said that his mother lived to be 100 and spent her final years in a nursing home. The care was expensive enough to wipe out all of her assets in just three years, including the value of her house. After that, she had to turn to Medicaid, the government health program for the poor.
“That’s why we bought insurance, so that all of our assets wouldn’t be gobbled up by nursing-home costs,” Mr. Sproule said.
In liquidation, the policies will be canceled, and the guarantee fund will take care of $300,000 worth of claims. “We end up suffering about a 48 percent loss,” Mr. Sproule said. It took the couple 18 years to build up their policies’ value to $573,000 apiece. Mr. Sproule said he was sure it was too late to go out and buy coverage to replace what they had lost.Photo
“We’re probably uninsurable,” he said. “You buy long-term-care insurance when you’re young and healthy, because that’s how you pay the lower premium.”
They were also encouraged by a federally financed program in which states urged their residents to buy long-term-care insurance. The goal was to keep Medicaid from being overwhelmed by tens of millions of aging baby boomers.
The Sproules, Ms. Leonard and all the rest of Penn Treaty’s policyholders have spent the last nine years in a strange legal limbo. State insurance regulators in Pennsylvania first petitioned the Commonwealth Court of Pennsylvania to order liquidation in 2009, which is standard procedure.
But then the standard playbook went out the window. Droves of insurance agents challenged the petition in court. That’s because as long as Penn Treaty stayed out of liquidation, they would keep receiving their sales commissions, which they said they were constitutionally entitled to.
Health insurers fought the liquidation, too. State guarantee funds, it turns out, are not funded at all. When an insurance company goes under, all the surviving companies in that line of business are required to chip into the guarantor, with assessments based on their market share.
Long-term-care insurance is classified as health insurance, so health insurers would get the assessment — even the ones that steered clear of long-term-care insurance and never sold a single policy. They were aghast at having to pay for other people’s mistakes.
Big insurance companies rarely fail in the United States. Most of the time, an ailing insurer will quietly find a buyer, and vanish under its rescuer’s wing. Policyholders may not know what happened, or care, as long as their claims are paid.
The dearth of visible insurance failures makes it seem the industry’s squadrons of actuaries and regulators will always get things right, measuring complex risks accurately and charging premiums that will cover all future claims.But the failure of Penn Treaty shows that was not really true. It’s quite possible for a regulated insurer to miscalculate its book of business, operate for years without correcting the mistake, and ultimately take policyholders into the very realm of loss and uncertainty that insurance is specifically designed to avoid.
Now, some fear Penn Treaty’s failure is a signal of more trouble to come in the long-term-care sector. (...)
Michelle Leonard, a Penn Treaty policyholder in Venus, Fla., said she was shocked to learn of the liquidation.
“It’s time for me to go to a facility to live out my days,” she said, explaining that she had already selected a group home, submitted an application and been accepted (but had not yet sold her house). “They may not take me now. I may not have enough assets to go in.”
Each state has a so-called guarantee fund to rescue policyholders in insurance failures. The funds pay people’s claims, up to a predetermined limit that varies by state. The limit is $300,000 in Florida.
“But how long does that take?” Ms. Leonard wondered. She said that she had not yet heard from the guarantee fund, but added that she had received mailings instructing her to keep on paying her monthly premium in full, even if it rises, or else her coverage would be canceled.
“Oh, hey! We’re going down the toilet but keep paying your premium,” she said, mocking the letters. “It’s very upsetting.”
Other Penn Treaty customers agreed. “That’s why we have C.P.A.s and actuaries and insurance professionals — to run the business properly,” said Charley Sproule, a policyholder in Harrisburg, Pa. “In my opinion, the actuaries and executives and the board should be held legally liable for this, but they won’t. They’ll get off scot-free.”
In Pennsylvania, the guarantee limit is also $300,000. Mr. Spoule said the cash value of his policy was close to double that — $573,000. So is the cash value of a separate policy held by his wife, Mary Lou.
Mr. Sproule said that his mother lived to be 100 and spent her final years in a nursing home. The care was expensive enough to wipe out all of her assets in just three years, including the value of her house. After that, she had to turn to Medicaid, the government health program for the poor.
“That’s why we bought insurance, so that all of our assets wouldn’t be gobbled up by nursing-home costs,” Mr. Sproule said.
In liquidation, the policies will be canceled, and the guarantee fund will take care of $300,000 worth of claims. “We end up suffering about a 48 percent loss,” Mr. Sproule said. It took the couple 18 years to build up their policies’ value to $573,000 apiece. Mr. Sproule said he was sure it was too late to go out and buy coverage to replace what they had lost.Photo
“We’re probably uninsurable,” he said. “You buy long-term-care insurance when you’re young and healthy, because that’s how you pay the lower premium.”
They were also encouraged by a federally financed program in which states urged their residents to buy long-term-care insurance. The goal was to keep Medicaid from being overwhelmed by tens of millions of aging baby boomers.
The Sproules, Ms. Leonard and all the rest of Penn Treaty’s policyholders have spent the last nine years in a strange legal limbo. State insurance regulators in Pennsylvania first petitioned the Commonwealth Court of Pennsylvania to order liquidation in 2009, which is standard procedure.
But then the standard playbook went out the window. Droves of insurance agents challenged the petition in court. That’s because as long as Penn Treaty stayed out of liquidation, they would keep receiving their sales commissions, which they said they were constitutionally entitled to.
Health insurers fought the liquidation, too. State guarantee funds, it turns out, are not funded at all. When an insurance company goes under, all the surviving companies in that line of business are required to chip into the guarantor, with assessments based on their market share.
Long-term-care insurance is classified as health insurance, so health insurers would get the assessment — even the ones that steered clear of long-term-care insurance and never sold a single policy. They were aghast at having to pay for other people’s mistakes.
by Mary Williams Walsh, NY Times | Read more:
Image: Zack Wittman
[ed. What a mess.]
